Q4 2022 Allegro Microsystems Inc Earnings Call
Good day, and thank you for standing by welcome to the Allegro Microsystems Q4 fiscal 2022 financial results.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone if you require any further assistance. Please press star Zero I will now hand, the conference over to your first speaker today Katie Boy.
You may begin.
Good morning, and thank you for joining us today for <unk> fourth quarter and full year results for fiscal year, 2020 two.
I'm joined today by <unk>, President and Chief Executive Officer Robin egg.
Chief Financial Officer, Derek Denser Leo.
Well review, our quarterly and annual financial performance and provide a summary of our outlook.
Our earnings release, and the accompanying financial tables are available on the Investor Relations page of our website.
All at the webcast it and a recording will be available on our IR page shortly.
Please note that comments made during this conference call include forward looking statements as defined by federal Securities laws.
These forward looking statements include projections or other statements about future events that are based on current expectations and assumptions and as a result.
Subject to risk and uncertainties that could cause actual results can vary materially from our projections.
Please refer to the earnings press release, we issued yesterday and other documents filed by us with the SEC, including the risk factors discussed in detail in our most recent 10-K.
On may 19th 2021.
The company assumes no obligation to update any forward looking information presented.
The non-GAAP financial measures that are discussed today are not intended to replace or be a substitute for the presentation of the Lakers GAAP financial results and maybe calculated differently than similar measures used by other companies.
We are providing this supplemental information because it may enable investors to make meaningful comparisons of core operating results and more clearly highlight the results of our core ongoing operations.
A reconciliation of GAAP to non-GAAP financial measures referenced during today's call can be found in our earnings press release, which has been posted to our IR page.
Now I'll turn the call over to a labor its president and CEO Ravi vague.
Robbie.
Thank you Katie and good morning, everyone before we get started with that commentary on fiscal 'twenty two.
And fourth quarter results I'd like to pause here to acknowledge the Ukraine crisis.
With our team members in Ukraine, and the people of Ukraine, and the World must stand together in support of a resolution of this terrible situation.
Allegra delivered outstanding results in fiscal 2022, achieving several new records, including robust annual revenue growth of 30%.
Resulting in the highest annual revenue in <unk> history as.
As well as record profitability, including 410 basis points.
non-GAAP gross margin expansion contributing to non-GAAP EPS growth of 70% for the full year.
Our earnings growth of over two X revenue growth demonstrates a solid leverage in our operating model as we continue to deliver increasing profitability.
Profitability and shareholder value on incremental top line growth.
We capped the year on a high note with strong fourth quarter execution to drive revenue records across all product lines and in our automotive and industrial end markets highlighting key differentiators in the Allegro business model diversification across customers products and applications as well as our alignment to <unk>.
High growth markets like X C V eight S datacenter and industrial.
Importantly in fiscal 'twenty, two R&D teams demonstrated our commitment to technology innovation leadership by collaborating globally to further our product road map through important advancements in <unk> technology disruptive solutions for Adas applications and market, leading solutions for <unk> and data center.
We've seen strong customer acceptance of our solutions with record levels of design win activity and more than 50% of these wins are on new products.
Our strategic growth focus areas anchored on key trends in vehicle and infrastructure electrification autonomous vehicle control and efficient motion control also represented more than half of our total design wins during the year, giving us confidence in our long term growth trajectory.
With a strong alignment to the secular growth trends large and expanding Sam design win momentum and record levels and growing backlog, we're off to a great start in fiscal 2023.
We continue to navigate through the supply demand imbalance and we are raising our full year revenue growth outlook to the high teens.
Before turning the call over to Derek I'd like to comment on yesterday's announcement regarding my retirement from Allegro after 38 years.
Over the course of my career I've had the opportunity to lead and transform allegro into the innovative company that it is today, culminating in our successful IPO in 2020, and now a record fiscal 'twenty two performance I am proud of the company. We've built the transformation we've completed.
The secular growth vectors that we've aligned to the growth and profitability trajectory that we have created and the terrific team of people here.
We need to now go while his extensive leadership experience and proven track record in multiple industries makes him a strong choice to succeed me as CEO to lead the company into the next phase of growth.
Look forward to assisting both beneath and Derek and an orderly transition of will continue serving in an advisory role to the company.
<unk> market opportunity has never been greater and have a great deal of confidence in the Lego team's ability to continue delivering unprofitable outsized growth.
I'll now turn the call over to Derek for color on the financials.
Thank you Ravi and good morning, everyone before I move on to the financials I'd like to take the opportunity to congratulate Ravi on his incredible career here at Allegro as CEO , you've successfully let a tremendous strategic transformation of the company and fostered a culture of innovation that has resulted in significant revenue growth and profitability is very successful.
And our record fiscal 'twenty two.
We are well positioned for continued profitable growth.
Now I would like to provide some context on what we see in terms of market conditions. Our products are well aligned to essential features and systems, particularly in our focus areas of FCB Adas and industrial we view our alignment to these focus areas our secular growth drivers for the company.
Customer demand remains very strong across our served end markets and geographically diverse we ended March with record firm backlog again, an extended visibility.
Demand continues to exceed available supply constrained in the near term by tightness in 200 millimeter wafer availability, we have been successful in expanding our supply, especially with a ramp at TSMC and that committed capacity is expected to support our increased fiscal 'twenty three growth outlook.
Now turning to the full year fiscal 'twenty two financial results revenue for the fiscal year 'twenty two was a record $769 million an increase of 30% year over year. Our team members continue to successfully navigate through wafer capacity and supply chain challenges. We are pleased to have delivered revenue ing.
Greece's across all of our served markets and geographies.
For the full year, our automotive revenue increased by 34%. This compares favorably to automotive semiconductor growth of 30% indicative of the significant content per vehicle growth. We are benefiting from due to the trend towards autonomous and electrified vehicles.
In addition, we believe we are still in the early innings of a car production recovery with distributor and customer component inventories at very low levels.
Our industrial revenue increased by 40% year over year to $133 million and there are other revenue increased by 6% year over year to $104 million.
Our distribution channel represented 37% of fiscal 'twenty two sales. The result of our successful initiative to continue to improve our scale and focus in the broad market. Once again, no single customer represented more than 10% of our revenue in the year.
GAAP gross margin for the year was 53% compared to 47, 2% in fiscal 'twenty one.
non-GAAP gross margin was 54, 1% compared to 50% in fiscal 'twenty, one an increase of 410 basis points.
The improvements in gross margin in the year, a result of our operational transformation higher Asps and more feature rich products increased leverage of our distribution channel and continued efficiency and leverage on higher volumes.
For the full year GAAP operating margin was 17, 8% of revenue and non-GAAP operating margin was 23, 2% of revenue an increase of 680 basis points over fiscal 'twenty one.
The significant improvement in non-GAAP operating margin as a result of both our gross margin improvements and the operating leverage on the Opex in our business model.
GAAP diluted earnings per share was <unk> 62 cents and non-GAAP diluted earnings per share was <unk> 78, an increase of 70% year over year more than double the percentage increase in revenue.
From a balance sheet and liquidity standpoint, we ended the year with $290 million in cash and equivalents and $25 million in long term debt.
During fiscal 'twenty, two we generated $156 million in cash flow from operations capital expenditures were $70 million and free cash flow was $86 million.
Now turning to Q4 results.
Revenue in the fourth quarter was a record high $200 $3 million, an increase of seven 3% sequentially and above the high end of our guidance range. As a result of our continued ramp of our foundry partners.
The motive revenue increased 8% sequentially to $141 million and was up 19% compared to Q4 of the prior year.
Industrial revenue also increased by 9% sequentially to nearly $35 million up 19% year over year.
Our other business grew 2% sequentially to $24 $4 million down 11% compared to last year.
Gross margin for the quarter was 54, 7% compared to 54, 2% in Q3.
non-GAAP gross margin rose another 77 basis points sequentially.
To 55, 6% above the high end of our guidance range and an all time high for Allegro non.
non-GAAP gross margin in the quarter benefited from the timing of ASP increases versus input costs favorable foreign exchange and volume leverage in our internal assembly and test facility.
We are very pleased with our continued gross margin expansion throughout fiscal 'twenty, two leading to record levels last quarter.
In Q1 of 'twenty, three we expect the ESP versus input cost timing to normalize and we expect non-GAAP gross margin to be in the 54% to 55% range consistent with what we had previously stated.
We also expect to continue to make progress toward our non-GAAP gross margin target of 55% on a sustainable basis.
Total GAAP operating expenses in the quarter was $79 4 million and included stock compensation charges of $14 9 million.
Certain onetime consulting fees and some minor COVID-19 related expenses.
GAAP R&D expense was $32 4 million and GAAP SG&A expenses were $46 8 million.
non-GAAP operating expenses were $64 $8 million in the quarter with 32% of revenue compared to $59 $2 million in Q3.
The sequential increase is due primarily to higher variable compensation driven by outperformance on the top and bottom line as well as the timing of certain R&D project related expenses.
non-GAAP R&D expense was $31 3 million and non-GAAP SG&A was $33 5 million.
We do expect non-GAAP operating expenses to revert towards our model about 30% of revenue in Q1 of fiscal 'twenty three a sequential decline compared to Q4, as we reset variable compensation to new fiscal 'twenty three targets.
GAAP operating income for the quarter was $30 $2 million and non-GAAP operating income increased to $46 $5 million compared to $43 1 million in Q3.
The GAAP effective tax rate in the quarter was 14, 9%.
And the non-GAAP effective tax rate in the quarter was 15, 4% for.
For Q1, we expect our non-GAAP tax rate to be approximately 16%.
Our Q4 diluted share count was 192 point $192 1 million shares and we expect Q1 diluted shares could be $192 6 million.
GAAP net income was $25 $7 million with 13 cents per diluted share.
non-GAAP net income was $40 $2 million or 21.
For sure now.
Now moving to the balance sheet and cash flow.
We ended Q4 with DSO of 54 days compared to 52 days in Q3 net.
Net inventory increased by $7 million, which represents 87 days compared to 84 days in Q3 still below our target of about 100 to 110 days.
In addition channel inventories remain at historic lows, while pls sell through was at historic highs.
We generated $37 $6 million in operating cash flow in the quarter.
In summary fiscal 'twenty two was a strong growth year capped by a record Q4, and we continue to make meaningful progress towards our target financial model. We are also entering fiscal 'twenty three with record backlog alignment to secular growth drivers, great technology and products and a strong financial position now I will turn.
On the call back over to Ravi Ravi.
Thank you Derrick I couldnt be proud of our team's achievements in fiscal 'twenty, two and we have great momentum entering fiscal 'twenty three.
Looking back on the year from a product perspective magnetic sensors represented 65% of sales in fiscal 'twenty, two up 29% year over year and all of our magnetic sensor product lines achieved revenue highs the business became increasingly diversified as our current sensors and angle sensors, one new and high.
<unk> sockets, and ex EV, Adas and industrial applications, helping cement our market leadership position.
Power products represented 35% of sales in fiscal 'twenty, two up 32% year over year.
We saw a rapid adoption of our motion control and power management solutions, and automotive data center and industrial applications with both power product lines achieving record highs.
We recently announced that we have shipped.
Three billions motor driver IC, a great example of the momentum we have for our motion control solutions.
Moving onto markets automotive represented 69% of revenue in fiscal 'twenty, two up 33% year over year benefiting from strong content expansion advanced driver assistance systems comfort and convenience and vehicle electrification applications.
With an automotive X cdna das represented 36% of sales in fiscal 'twenty, two up from 33% in fiscal 'twenty one and.
In the quarter, our ex TV product sales accelerated to new highs up 75% over the prior year comparing favorably to ex EV car production, which rose 33%.
The shift to Cvs continues to benefit of <unk> growth and increases our content per vehicle.
Great example of this is in the popular 2022, midsize sedan, where our content grows from $20 and then in the internal combustion engine model to $30 in the battery electric model with countless other similar examples at Oems globally, we really do win with cars electrify.
We also win with Adas adoption in fiscal 'twenty, two our Adas business reached new highs up nearly 30% over the prior year. We are now shipping more than 200 million units into Adas applications annually, and we continue to diversify our adas customer base globally at additional leaders and braking and steering.
The breadth and depth of <unk>.
These relationships gives us the applications know how to continue to innovate our product roadmap and provide unmatched value to our customers.
Beyond braking and steering and a dash of making progress in Lidar, our first prototype of a $15 15 nanometer one by far.
Photo detector products automotive applications achieved outstanding performance in lab evaluations in Q4, we sample lead lidar customers I'm very encouraged by the excitement about our up integrated easy to use solution. This is our first roadmap product and a new photonics receive a platform and it is important to validate our technology.
As a foundation for our future roadmap.
We're expecting to have final samples by the end of summer.
As vehicles are being re imagined we are winning in <unk> because of three core competencies are.
Innovation innovative technology deep applications knowledge, and our close customer collaboration.
This was showcased in our recent cross portfolio Adas braking win on a new system that facilitates EV regenerative braking and level two plus Adas features.
It is a great example of the synergies in our product lines and our ability to innovate to provide best in class future proof complete solutions born out of strategic long term collaboration with industry leaders.
Across automotive our Xmr on Silicon technology, which offers significant performance benefits and magnetic field sensing applications and continues to be adopted as it becomes a meaningful portion of the magnetic sensing market.
We're gaining share globally in transmission in camp sensors with the broadcast broadest portfolio of GMI based solutions on the market today with.
We're building on our exit success by expanding our TMR angular sensing offerings with initial product aimed at a variety of applications, where high resolution and reliability is valued by our customers from eight am to industrial automation.
Let me next turn to the industrial market industrial represented 17%.
<unk> revenue in fiscal 'twenty, two up 40% year over year.
Coming into the year, we expected that all major industrial categories would grow year over year and our teams executed on that mission.
<unk> are well aligned to multiple growth vectors within industrial and areas like industrial automation, where our sensing and motion control products helped make factories more energy efficient more productive and safer.
We believe the tailwind in automation have longevity fueled by productivity.
Activity needs along sustainability goals.
Enabling the next generation EV charging infrastructure is another bright spot for Allegro, we seen rapid adoption of our products and EV charging systems with revenue more than doubling year over year in fiscal 'twenty two.
We had significant design wins in this space last quarter contributing to 10 significant design wins in Europe alone over the past 18 months.
Our data center business also continues to accelerate in Q4 and more than doubled over the prior year and we believe the business will approach 7% of our sales by the end of this year, becoming our fastest growing application both of revenue and percentage basis. The.
The market for our data center cooling solution is strong and we expect we estimate that our Sam will grow at the mid teens CAGR.
Over the next three years, surpassing $300 million.
And supported the growth that we're seeing in data center <unk> in industrial we continue to expand our manufacturing capability and capacity.
Our asset light strategy.
With 200 millimeter capacity expected to remain tight and underinvested industry wide. We continue to expect that the industry will face a supply demand imbalance through this year, we have pursued extended long term commitments with our three foundry partners securing capacity to support our current business outlook.
We're also expanding our backend supply base and our operations team continues to take a long view to foster relationships with our partners in order to expand production capacity to support our growth in strategic areas.
Certainly our ongoing success is powered by our innovative global team and anchored on a winning culture.
Our recently launched hybrid working model flex at Allegro is an important cornerstone of our culture, giving us a competitive edge in the town market. While also striking a balance that's good for our business our customers and our planet.
Programs like this help us foster a culture that drives innovation evidenced by our strong IP portfolio, which now exceeds 12 150 active patents.
Our winning culture has displayed a significant role in driving.
<unk> aligned to our broader vision to move technology in the world to a safer more sustainable future.
Now turning to our Q1 outlook.
We expect sales to be in the range of $205 million to $210 million we.
We expect automotive and industrial to be up low single digits sequentially, while other will be flat.
We expect non-GAAP gross margin to be in the range of 54% 55%.
We anticipate non-GAAP earnings per share will be in the range of 22 to 'twenty three.
As we enter our new fiscal year, we expect our alignment to secular growth trends and strong design win momentum will continue to serve as strong growth drivers contributing to an increase in our full year revenue outlook to the high teens.
We anticipate continued market expansion towards our operating model and continued opex leverage resulting in targeted EPS growth of <unk> revenue growth.
I believe we are extraordinarily well positioned to seize the opportunities ahead of us to provide innovations that offer unique value to our customers to advance safety and energy efficiency for the world and to deliver shareholder value.
We will be now happy to take your questions Katy.
Thanks, Ravi that concludes our prepared remark, we will open the call for questions.
Please review the question and answer instructions for our participants.
Yes ma'am.
Reminder, to ask a question you will need to press star one on your telephone again that is star then the number one to withdraw your question Christy pound key.
Standby, while we compile the Q&A roster.
Your first question will come from Gary Mobley with Wells Fargo Securities. Your line is open.
Good morning, everybody I guess changes are in the wind at Allegro micro four for many of you for different reasons and let me extend my congratulations on a strong finish to the year and with respect to changes Rob. If we can start there and maybe if you can give us a little background on how you were approaching your retirement.
I presume that since you haven't had the name replacement. This has been months in the making my reading that right.
As a board.
And I have been discussing my retirement objectives for quite a while and in parallel the board conducted a search.
Search looking to see on alternatives. My date was flexible based on when they found the appropriate candidate.
He used it extraordinarily disciplined search methodology to to.
To look for the best available candidates and I think it is beneath they've found a worthy successor of someone who will drive the company and take us to the next level.
I appreciate that.
And with respect to your fiscal year 'twenty three revenue outlook of high teens percent.
I would presume that.
Once you get beyond the first quarter here.
<unk> acceleration in the topline and instruments that maybe $10 million sequentially.
And maybe you could give a little background on the.
Ramp that you are seeing at TSMC.
The foundry partner and the support of that revenue acceleration.
So as previously discussed we have.
<unk> been on a long term path with TSMC to grow our capacity.
Again as previously discussed we are expecting revenue to constantly accelerate quarter over quarter with the most impactful acceleration occurring in Q3, our fiscal Q3 and our fiscal Q4. So you will see quarter over quarter growth as we have guided and will continue to see the growth as <unk>.
<unk> comes on it's wafers come out and as we continue to turn them into products and into shipments. The demand certainly is there for us in especially anchored with our secular growth vectors industrial Adas ex EV. All three areas are are driving our demand.
Thanks Ravi.
Yes.
Your next question will come from Blayne Curtis with Barclays. Your line is open.
Thanks for taking my question and I'll Echo the congrats to all.
I guess, maybe just following up on that question.
As you think about the fiscal 'twenty three.
If you kind of think about it between auto and industrial just wanted to know if theres any difference in your forecast between those segments.
And then I just wanted to understand the raise.
With that your ability to get better supply or did you always have this delta and I guess, you're just feeling more confident in the demand profile.
Yes so.
We are pretty deliberate company and we had aligned our demand commitments to our customers along with the.
Our supply commitments that we received from our from our foundry partners. So we are pretty well aligned.
And customers have adjusted their ramps appropriately to aligned with.
With supply availability.
We expect that industrial will modestly outgrow, our automotive business, but our automotive business also has great secular trends.
They are really being the growth is really being led by the Adas <unk> area, where you see level two adas systems, the adoption rate of them continuing to increase and you see X CV growth.
Growth year over year quite dramatic despite anemic car production levels.
It's actually a great lead into my second question I wanted to ask a little bit more about that actavis pipeline, you've clearly seen a shift to SUV I think projections.
Getting to at least 50% of vehicles and then obviously further beyond that I'm just curious from your perspective.
As you look at it's either share content or adoption of SUV. What do you think is the biggest driver for your business over the next couple of years.
Yes so.
In prior calls we have provided a pretty simple staff, which was one out of every two inverters will using our legacy products.
Any in an inverter you could have anywhere between six to 12 of our current sensors in them. So we are extraordinarily.
Extraordinarily well positioned globally, we're not regionally anchored.
Our <unk> customers are global but we also see secondary applications like onboard charges for our products will all charges, we see the DC to DC converters as being an area and then we see in the power area, we see battery cooling fans et cetera. So.
This is a major growth area and.
<unk> year over year our production.
<unk> is up 44%.
Full year basis.
When the total car production in a fiscal year basis is only up 9%. So you can see the acceleration of FCB and from.
From an adoption perspective, and that's really what's giving us a secular tailwind.
Thanks, so much.
Your next question will come from Sweeny jewelry with Smbs in Nikko Securities. Your line is open.
Yeah, Good morning, Ravi and Eric and Ravi, Let me Echo my congrats.
So a question on the supply side Ravi so.
As more supply comes online from your foundry partners.
When do you see your own balance sheet inventory normalizing and also when do you see channel inventory normalizing I guess, what does your high teens guidance contemplate in terms of your on balance sheet inventory and channel inventory.
We don't see any material change in either one of those areas we continue to.
Ship our products to two of these growth vectors that are supported by design wins and as we said earlier.
The supply demand imbalance continues 200 millimeter continues to be the constraint. So we won't see.
At least in the near future any significant or material change in our inventory.
Okay got it and then in terms of the gross margins direct so you talked about the time lag between the price increases in the cost increases.
I'm just curious as we look out beyond the next quarter what are some of the puts and takes or the price increase is pretty much behind us or are there more opportunities and then where do you see the potential tailwind or headwinds as we go through the year.
Yes, Hi, this is Derek so going from Q3 to Q4, the gross margin improvement was really split between some of that about half and half between that pricing ahead of input costs and the other half was foreign exchange.
So the foreign exchange of course, we don't predict that going forward.
But in terms of going forward right now, we expect the ASP and the cost inputs to normalize and thats baked into our forecast for Q1 and for the rest of the year.
We will continue to look at strategic price increases will also continue to look at ways to improve that gross margin with internal efficiencies. So when I say that we got to 55, 6% in Q4, we're happy about that but we want to be there on a sustainable basis and will continue to look for efficiencies and offsetting any input cost with with pricing.
Got it thank you.
Again, if you would like to ask a question you May press star one on your telephone.
Your next question will come from Quinn, Bolton, we'd need him and company.
Hey, guys, let me offer my congratulations and particularly the Euro IV for congratulations on your retirement I wanted to start just looking at the mid to high.
High teens growth in fiscal 'twenty three on the auto side can you give us some sense. What do you think the mix is between vehicle production gains versus content lift fiscal 'twenty three versus fiscal 'twenty two.
Good question.
I believe our fiscal 'twenty three car production model says that it's about <unk>.
9% a year.
Year over year.
Oil.
And.
And.
We expect our comp total content growth to be 9% on top of that so.
So there is a.
Pretty good acceleration and as you know.
We are not expecting.
We continue to expect that the internal combustion business will remain soft and but we do expect that adas level two and.
And also our <unk> business will continue to outperform.
Great and then just wanted to ask we've talked a lot about TSMC an increase in wafer capacity from TSMC over time could you give us. Some sense are you seen increases also from UMC and polar.
Yes, we see increases from all partners and as you know with with wafer fab capacity, it's lumpy, it's not incremental so we've received increased the amount of wafers from polar.
And we received an increase from UMC, we've written increased.
From TSMC and we continue to expect.
Other increases from our supply chain going into next year or two.
Great and then my last question was just sort of really a clarification. It sounds like at least over the next few quarters revenue growth is primarily limited by wafer capacity or wafer availability, so seasonality that you've seen in past years, where the December quarter, maybe slower seasonally thats not where you are.
Expecting in.
Fiscal 'twenty three.
Yes, we will expect a mild effect of basically the Christmas factory shutdowns, but we do expect that the availability of of wafers and material from TSM will far out.
Outsized.
The slowdown that we get from the from.
From the Christmas New year break so that particular seasonality is not particularly impactful for our fiscal Q3 period or the early fiscal Q4 period.
Great. Thank you.
Again, if you would like to ask a question you May press star one on your telephone.
And I'm showing no further questions at this time I will now hand, it back over to Ravi for closing remarks.
Thank you operator.
With this being my last earnings call I'd like to take this time to thank all of our shareholders and covering analysts as well as our employees customers and the board for their thoughtful support throughout the years the relationships have developed with each one of you and have been have been rewarding and a highlight of my time at Allegro.
Thank you again for all of you who have joined US today. This will conclude today's call. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
[music].
Yes.
Yes.
Okay.
[music].
Who.
[music].
Okay.
Yes.
Sure.
No.
[music] growth.
Yes.
Yes.
Sure.
[music].
Okay.
Youre welcome.
Okay.
[music].